How Bitcoiners Should Watch the US Federal Reserve Meeting on Wednesday

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It’s the debate that the Federal Reserve isn’t ready for: How can we keep inflation from spiraling out of control once the economy reopens?

Given the devastating effects of the coronavirus and the trillions of dollars of stimulus pumped into the financial system over the past year, top economists say the impending transition could be one of the more challenging episodes in the Fed’s 108-year history – and so will This at the same time a crucial test for the use of Bitcoin as a possible inflation hedge.

Economists will watch Fed Chairman Jerome Powell’s remarks on Wednesday as he rounds up the January Federal Open Market Committee (FOMC) meeting. Powell’s comments will primarily focus on the short-term economic outlook, but may contain clues as to how the central bank plans to proceed in the medium to long term.

Short term

Over the past few weeks, regional Fed presidents have raised the question of whether the Fed will recall or continue a quantitative easing program to buy treasuries worth $ 80 billion a month and mortgage-backed securities worth $ 40 billion a month. That program is likely to stay the same until consumers spend again in a COVID-free world, economists say.

“If you look at breakevens or any kind of market indicator or even consensus forecasts from economists, none of them are showing inflation above 2% in the next five years,” said David Beckworth, former international economist with the US Treasury Department. “With the introduction of the vaccine, all of these pent-up savings will be spent. It’s going to be a hot economy. Will the Fed nip it in the bud? “

Nobody expects the Federal Reserve to act on interest rates or asset purchases this week, said former Federal Reserve economist Claudia Sahm, but investors will be looking for updated news from Powell.

Sahm expects Powell to repeat what Vice Chairman Richard Clarida said in early January about the Fed, which is unlikely to hike rates until inflation is 2% for a year.

“The Fed has never held interest rates back as inflation was 2% for a year,” said Sahm. “We haven’t seen sustained inflation of 2% since before 2008, but it is important that you say so because we will see inflation higher than now.”

Beckworth said he was hoping for similar asset buying guidelines.

Powell is likely to offer a “steadfast view” of the Fed’s operations, said Harvard economist Ken Rogoff. He doesn’t want to draw attention to the Fed, added Rogoff.

Lower inflation estimates are likely to dampen Bitcoin backers’ excitement, but crypto investors could see the Fed change their minds later this year.

Stay on course

The FOMC is currently planning a stable monetary policy. But steady expectations have changed in the past, said Lawrence White, an economics professor at George Mason University.

“People are sitting on huge piles of money in relation to their income – much higher than they normally hold,” said White. “We could see a little over 2% by the time the Fed changes monetary policy … if [Powell] There are signs of inflation and he may feel justified in tightening monetary policy. ”

Just because inflation is low in the US doesn’t mean bitcoin doesn’t have an opportunity to prove itself as a hedge against inflation, White said.

“It’s not just US inflation that people are switching to Bitcoin to avoid,” White said. “Venezuela, Lebanon and Argentina have bullish Bitcoin markets – places with very high inflation. … I don’t think the Bitcoin market is closely related to monthly US inflation numbers. So people who think of it as an inflation hedge think longer term. “

Other narratives that determine Bitcoin’s value are dissidents looking for payments that are difficult to censor, White said. Most recently, Bitcoin donations to Alexey Nalvany, the main antagonist of Russian President Vladimir Putin, rose 3.7 BTC.

“That helped me understand why there is niche demand for Bitcoin as a medium of exchange,” White said. “It’s not just about buying it in the hope that some bigger fool will buy it from me in the future.”

Positive outlook

Aside from major contractions in the economy, the Fed has already signaled that it has no plans to increase asset purchases in the future.

Because of this, the FOMC will also focus on the effectiveness of the vaccine rollout versus the spread of new COVID-19 variants, Sahm said, observing that an uncontrolled outbreak does not cause fear among consumers. Mass layoffs and spending cuts in March 2020 occurred in places with and without strict lockdowns – mostly because Americans were generally afraid to go public, Sahm said.

“We could have a positive spiral this spring and this summer, but that’s not guaranteed,” Sahm said. “The expectations of people and consumers build on the side of small businesses. These are really important to behavior and are not always determined by clear economic events. … There are virus fears that differ across the country and by political affiliation. ”

The central bank will try to see when spending can come back into full force and how quickly the economy can return to full employment.

“The Fed has been expanding the monetary base rapidly for a year,” said White. “M1 is up 72% and M2 is up 27% over the past 12 months and we haven’t seen the kind of inflation you’d normally get from it.” (M1 contains very liquid funds like cash, sight deposits and travelers checks; M2 contains less liquid funds like savings, certificates of deposit and money market funds.)

If all else is the same, an increase in M1 would produce 72% inflation, White added, but that number in itself means little. With the world stopped spending during the pandemic-triggered recession, it’s doubtful the economy will see a double-digit inflation burst.

If people go to restaurants and eat regularly again, the Fed may have to “take back the money supply” to avoid inflation well above 2%, White said.

Let it boil

If the Fed supports the financial markets while 10 million Americans are out of work, inequality will increase. According to Beckworth, Powell’s best solution to help the US recover is.

With low interest rates, investors look for yield and run to any high-yielding asset.

“It drives art, it drives cryptocurrencies, it drives gold, it drives everything,” said Rogoff. “Whether or not you think it’s a bubble depends on the likelihood of real interest rates rising.”